U.S. Home Corporation v. Settlers Crossing, L.L.C. et al

Filing 95

MEMORANDUM OPINION. Signed by Chief Judge Deborah K. Chasanow on 3/11/10. (sat, Chambers)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND U.S. HOME CORPORATION, v. SETTLERS CROSSING, LLC, et al. : : : : : Civil Action No. DKC 2008-1863

MEMORANDUM OPINION Presently pending and ready for resolution in this breach of contract case are two motions to dismiss. Defendants have

filed a motion to dismiss Counts IV, V and VI of the first amended complaint and (Paper Lennar 63). Counter-Defendants have filed a U.S. Home to

Corporation dismiss the

Corporation (Paper

motion are

counterclaim

76).

The

issues

fully

briefed and the court now rules pursuant to Local Rule 105.6, no hearing being deemed necessary. Defendants' motion to dismiss For the reasons that follow, will be denied, and Counter-

Defendants' motion to dismiss will be denied. I. Background A. This gone awry. Factual Background case involves a commercial real estate transaction

Settlers Crossing, LLP ("Settlers Crossing") is a

Virginia limited liability company engaged in the business of and investment in real estate. Washington Park Estates, LLP

("WPE") is a Maryland limited liability company engaged in real estate investment and development. Home"), a Delaware corporation U.S. Home Corporation ("U.S. with its principal place of

business in Florida, is engaged in the business of building and selling residential property. U.S. Home's stock is solely owned

by Lennar Corporation, a Delaware corporation. During the summer of 2005, Lennar Corporation contacted

Settlers Crossing and WPE regarding purchasing a large property consisting of 1250 acres of farmland in three adjacent parcels ("the Property"). (Paper 66 ¶¶ 16-17). The Property consisted (Paper 66 ¶ 22). In

of raw, unfinished and undeveloped land.

August 2005, Lennar prepared a letter of intent that anticipated purchasing the property and constructing approximately 1867

dwelling units. On

(Id. at ¶ 17). 15, 2005, entered Settlers into a Crossing purchase and WPE

November

(collectively,

"Seller")

agreement

("Purchase Agreement") with U.S. Home for purchase and sale of membership interests relating to the Property. (Paper 52 ¶ 18). Simultaneously, Services Company ("Services ("Bevard"), U.S. Home entered with into a Contract for

Contract") a

the

Bevard

Development to conduct

Virginia

corporation,

development activities related to the Property.

2

The two agreements that U.S Home entered into each required a deposit: a $16 million deposit for the Purchase Agreement and a $4 million Development Fee deposit for the Services Contract. (Paper 52 ¶¶ 19-20). Under the Purchase Agreement and the

Services Contract, U.S. Home tendered a total deposit of $20 million. The Purchase Agreement that Seller and U.S. Home signed was amended three times: December 31, 2005, May 16, 2007, and June 19, 2007. (See Paper 1, Ex. 3 for Second Amendment). Under

Section 15(b) of the Purchase Agreement, U.S. Home was allowed to "terminate th[e] Agreement and receive return of its deposit" if Seller breached "any of its representations, warranties or covenants" and failed to cure any breach within "10 business days of receiving notice of the breach." (Paper 1, Ex. 1). Under

The Services Contract was amended on May 17, 2007.

that contract, Bevard, for the benefit of U.S. Home and for a fee, was obligated to obtain certain approvals and entitlements and to cover certain costs in connection with the development of the property. (Paper 1, Ex. 6).

On June 19, 2007, WPE obtained replacement financing from iStar Financial Incorporated ("iStar"). (Paper 66 ¶ 38). The

financing was a one-year bridge loan intended to be repaid at the settlement of the Purchase Agreement. (Id.).

3

On or about December 2, 2005, Defendant Steven Sandler, a principal Refund of at Settlers Crossing, entered that into the a Guaranty paid of in

Deposit,

guaranteeing

deposit

conjunction with the Agreement, $16 million, would be refunded to U.S. Home should an event occur which would entitle U.S. Home to a refund under the Agreement. On December 5, 2005, Defendant

Sandler entered into a second Guaranty of Refund of Deposit for the $4 million Development Fee Deposit U.S. Home paid under the Contract for Services. the Development Fee This guaranty obligated Bevard to refund Deposit in accordance with the Services

Contract.

(Paper 52 ¶¶ 30-31).

The parties set an initial closing date of December 5, 2007, provided that all conditions precedent set forth in

Section 11 of the Purchase Agreement had been satisfied. 52 ¶ 43). obligation conditions including

(Paper

Section 11 provided that U.S. Home was under no to proceed with in and settlement unless and were shall until all

precedent that "WPE

Sections Settlers

11(a)-(k) Crossing

satisfied, not be in In

material default under the Agreement."

(Paper 1, Ex. 1).

addition, Section 11(a) required that the "representations and warranties set forth in this [A]greement shall be true and

correct as of the Settlement. . . .

[T]he satisfaction of said

condition[s] [precedent] shall depend on the actual correctness

4

as of the time of Settlement of the facts stated in all such representations and warranties." The precedent Agreement were further (Paper 1, Ex. 1). that if any 5, conditions 2007, the

provided as of

unsatisfied

December

settlement date would automatically be extended to 30 days after all conditions precedent in Section 11 were satisfied, but no later than March 15, 2009. (Paper 52 ¶ 44).

On November 21, 2007, U.S. Home notified Settlers Crossing and WPE that certain conditions precedent, "including but not limited to certain off-site easements" had not been satisfied and, "[a]s a result, the Settlement Date is automatically

extended as provided for in the Agreement." Wineman Ltr., at 1-2; Paper 52 ¶ 56).

(Paper 1, Ex. 10,

On November 27, 2007,

U.S. Home, at Seller's request, identified the particular offsite that easements Seller that were allegedly to unsatisfied show that and the requested conditions

provide

evidence

precedent had been satisfied.

(Id., Ex. 11, Wineman Ltr.).

U.S. Home also noted that the list it provided in the November 27 letter "was not exclusive, and [did] not represent U.S. Home Corporation's Settlement." final (Id. review at 3). of all conditions did not precedent to to the

Seller

respond

November 27 letter and the December 5 settlement did not occur. (Paper 52 ¶¶ 58-60).

5

On December 6, 2007, Settlers Crossing and WPE filed suit against U.S. Home in the United States District Court for the Eastern District of Virginia seeking a declaratory judgment to determine which conditions precedent remained unsatisfied. That

suit has since been dismissed. (See DKC 2008-0267, Paper 98). On January 3, 2008, U.S. Home requested permission to

inspect the property pursuant to Section 13(a) of the Purchase Agreement. provides: Purchaser shall have the right from the date hereof through 11:00 p.m. Eastern Time on November 18, 2005 (the "Feasibility Study Period"), and . . . thereafter, with the prior approval of WPE, in each instance, until Settlement, to make such investigations, studies and tests with respect to the Property as Purchaser deems necessary or appropriate. (Paper 1, Ex. 1). In the same letter, U.S. Home stated that it (Paper 1, Ex. 12, Bass Ltr.). Section 13(a)

had concerns about the environmental condition of the Property. (Paper 1, Ex. 12, Bass Ltr.). Seller U.S. Home responded was not in on January of 4, the 2008, acknowledging Agreement, that but

breach

Purchase

denying U.S. Home's request to access the Property. Ex. 14, Sabourin Ltr., at 1).

(Paper 1,

U.S. Home made a second request to inspect the property on March 7, 2008. (Id., Ex. 13, Bass Ltr.). By letter dated March

6

14, 2008, Seller withheld approval for inspection. 15, Sabourin Ltr.).

(Id., Ex.

On April 28, 2008, after Seller obtained the four off-site easements enumerated in U.S. Home's November 27, 2007 letter, Seller set a Settlement date of May 26, 2008.1 (Paper 52 ¶ 83).

U.S. Home objected to this settlement date because it still had not been granted access to inspect the Property. 84). Seller (Paper 52 ¶

On May 16, 2008, U.S. Home sent a Notice of Default to based on Seller's refusal to permit an inspection.

(Paper 1, Ex. 20, Longwood Ltr.). advised Seller that certain

On May 23, 2008, U.S. Home precedent remained

conditions

unsatisfied and, as a result, U.S. Home was not obligated to proceed to settlement on May 27, 2008. 18, Wineman Ltr.). On May 30, 2008 Seller sent its own notice of default to U.S. Home for failure to go to settlement. July 3, 2008, pursuant to Section (Paper 52 ¶ 87). of the On (Paper 52 Paper 1, Ex.

15(b)

Purchase

Agreement, U.S. Home sent a notice of termination to Seller based on breach of Section 13(a) of the Agreement which gives U.S. Home the right to investigate and inspect the Property. (Paper 1, Ex. 22, Israel Ltr.). U.S. Home also demanded the (Id.).

return of $20 million, the sum of the deposits.

This date was later moved to May 27, 2008 due to the Memorial Day holiday. 7

1

B.

Procedural Background

On July 17, 2008, U.S. Home commenced the instant action by filing a complaint against Settlers Crossing, WPE, Bevard,

Sandler, and iStar. contractually based

(Paper 1). claims,

This complaint asserted several and asked the court for a

declaratory judgment. for summary judgment.

Seller and U.S. Home both filed motions (Paper 14 and 32). The court denied both

motions and granted a motion to commence discovery in an order on March 19, 2009. (Paper 42). After being granted leave, U.S. (Paper

Home filed a first amended complaint on May 18, 2009. 52). The charges. contract contract first amended complaint adds several

fraud-based

It alleges a total of seven counts: (I) breach of against against Settlers Bevard; Crossing (III) and WPE; of (II) breach of

breach

guaranty

against

Defendant Sandler; (IV) fraudulent inducement against Settlers Crossing and WPE; (V) fraud by concealment against Settlers

Crossing and WPE; (VI) breach of environmental representations and warranties against Settlers Crossing and WPE; and (VII)

judgment declaring that U.S. Home is under no obligation to settle if all conditions precedent have not been met and

declaring which conditions precedent have not been met. Settlers Crossing and WPE filed a motion to dismiss counts IV, V and VI of the first amended complaint on June 30, 2009, 8

(Paper 63) and, joined by Bevard and iStar, filed a counterclaim against U.S. Home on June 30, 2009. (Paper 66). On August 6,

2009, U.S. Home filed a motion to dismiss the counterclaim. (Paper 76). II. Both motions to dismiss are now fully briefed.

Standard for a Motion to Dismiss The purpose of a motion to dismiss pursuant to Fed.R.Civ.P.

12(b)(6) complaint. (4th Cir.

is

to

test

the

sufficiency

of

the

plaintiff's

See Edwards v. City of Goldsboro, 178 F.3d 231, 243 1999). Except in certain specified cases, a

plaintiff's complaint need only satisfy the "simplified pleading standard" of Rule 8(a), Swierkiewicz v. Sorema N.A., 534 U.S. 506, 513 (2002), which requires a "short and plain statement of the claim showing that the pleader is entitled "Rule blanket to relief." still of

Fed.R.Civ.P. requires a

8(a)(2). `showing,'

Nevertheless, rather than a

8(a)(2)

assertion,

entitlement to relief." 544, 555 n.3 (2007).

Bell Atl. Corp. v. Twombly, 550 U.S.

That showing must consist of more than "a

formulaic recitation of the elements of a cause of action" or "naked assertion[s] v. Iqbal, devoid 129 of S.Ct. further 1937, factual 1949 enhancement."

Ashcroft

(2009)(internal

citations omitted). In its determination, the court must consider all well-pled allegations in a complaint as true, Albright v. Oliver, 510 U.S. 266, 268 (1994), and must construe all factual allegations in 9

the light most favorable to the plaintiff.

See Harrison v.

Westinghouse Savannah River Co., 176 F.3d 776, 783 (4th Cir. 1999) (citing Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993)). The court need not, however, accept

unsupported legal allegations, Revene v. Charles County Comm'rs, 882 F.2d 870, 873 (4th Cir. 1989), legal conclusions couched as factual allegations, Iqbal, 129 S.Ct. at 1950, or conclusory factual allegations devoid of any reference to actual events, United Black Firefighters v. Hirst, 604 F.2d 844, 847 (4th Cir. 1979). See also Francis v. Giacomelli, 588 F.3d 186, 193 (4th "[W]here the well-pleaded facts do not permit the

Cir. 2009).

court to infer more than the mere possibility of misconduct, the complaint has alleged, but it has not `show[n] . . . that the pleader is entitled to relief.'" Iqbal, 129 S.Ct. at 1950

(quoting Fed.R.Civ.P. 8(a)(2)).

Thus, "[d]etermining whether a

complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.

This case involves an allegation of fraud, which requires a higher showing that to "in survive all a motion of to dismiss. or Rule mistake, 9(b) the

provides

averments

fraud

circumstances constituting fraud or mistake shall be stated with particularity." and other Fed.R.Civ.P. 9(b). of mind of 10 "Malice, intent, knowledge, a person may be averred

condition

generally."

Harrison v. Westinghouse Savannah River Co., 176 Not all the causes of action include allegations of

F.3d 776, 784 n.6 (4th Cir., 1999). alleged in the complaint at

issue

fraudulent behavior.

Only causes of action involving fraud must See Balt. County 922 Corp. (4th USA, Cir. 317

meet the higher standard imposed by Rule 9(b). v. Cigna Healthcare, 238 Fed. v. Appx. 914,

2007)(unpublished)(quoting

Vess

Ciba-Geigy

F.3d 1097, 1104 (9th Cir. 2003)). A plaintiff may choose not to allege a unified course of fraudulent conduct in support of a claim, but rather to allege some fraudulent and some non-fraudulent conduct. In such cases, only the allegations of fraud are subject to Rule 9(b)'s heightened pleading requirements. Id. at 1104. a Rule claim 9(b) be "does not with require that allegations when those

supporting

stated

particularity

allegations describe non-fraudulent conduct."

Id. at 1104.

III. Motion to Dismiss Counts IV, V and VI in the First Amended Complaint Seller moves to dismiss counts IV, V and VI of the first amended complaint, arguing that the statute of limitations bars the fraud-based claims; that the claims do not meet the

requirements imposed by Rule 9(b) of the Federal Rules of Civil Procedure; and that U.S. Home depends on a misreading of the Agreement to support all three claims.

11

A. Fraud-Based Claims: IV (fraudulent inducement) and V (fraudulent concealment) In the first amended complaint, U.S. Home alleges that the Seller willfully and intentionally misrepresented the

environmental condition of the property.

(Paper 52 ¶¶ 123-128).

U.S. Home maintains that the Property had been used for the disposal of sewage sludge for many years and hazardous materials remained on the Property; that the the Seller knew its

representations

concerning

environmental

conditions

precedent were false (or made with reckless disregard); that the Seller made the false representations to induce U.S. Home's

reliance and that U.S. Home relied upon the Seller's statements, investing substantial time and money into development of the Property. (Id.).

U.S. Home also alleges, in Count VI, that Seller owed a duty to ensure and the that truthfulness the Seller of all warranties and in the

Agreement,

intentionally

knowingly

misrepresented and warranted that the Property had never been used for the disposal of hazardous materials, and did not

contain hazardous materials.

U.S. Home maintains that Seller

intentionally failed to disclose and intentionally suppressed the concealed material facts relating to the environmental

representations and warranties to continue the false impression that the Property was free from hazardous materials, and that

12

U.S. Home relied on the reports by entering into and continuing to perform the Agreement. a. (Paper 52 ¶¶ 140-146).

Statute of Limitations

Seller first argues that the fraud counts are barred by the Maryland protected statute from of limitations. Seller The fraud by claims tolling are of not the

dismissal,

argues,

limitations period under the discovery rule because an inquiry by U.S. Home would have revealed the alleged fraud. U.S. Home maintains that it only recently became aware of the sludge disposal operate on the Property, and therefore the fraud claims were timely filed. Specifically, it argues that it

did not have express knowledge until recently, and that it could not have had "implied knowledge" based on environmental reports or the information at MDE. U.S. Home also argues that its March

7, 2008 letter "demonstrates that U.S. Home did not have notice of the sludge disposal operation at that time and had reasonably begun to investigate the possibility that the Property had

environmental problems."

(Paper 70, at 7).

A motion to dismiss pursuant to 12(b)(6) does not generally permit an analysis of potential defenses defendants may have to the asserted claims. However, dismissal may be appropriate when

a meritorious affirmative defense is clear from the face of the complaint. 181 (4th Brooks v. City of Winston-Salem, N.C., 85 F.3d 178, Richmond, Fredericksburg & Potomac 13

Cir. 1996)(citing

R.R. Co. v. Forst, 250 (4th Cir. 1993); 5A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1357, at 352 (1990)("A complaint showing that the statute of limitations has run on the claim is the most common situation in which the affirmative defense appears on the face of the pleading,"

rendering dismissal appropriate.)). The parties agree that the applicable statute of

limitations governing this dispute is the three-year statute of limitations set forth in Md. Code Ann., Cts. & Jud. Proc. § 5101. In Maryland, courts generally apply the discovery rule in Martin Marietta The

determining when a cause of action accrues.

Corp. v. Gould, Inc., 70 F.3d 768, 771 (4th Cir. 1995).

discovery rule provides that a cause of action accrues when a plaintiff knew or reasonably should have known of the wrong. Doe v. Am. Nat'l Red Cross, 923 F.Supp. 753, 756 (D.Md. 1996). A plaintiff reasonably should have known of the wrong when he had "knowledge of sufficient facts to cause a reasonable person to investigate further." 443 (1988). to run when Pennwalt Corp. v. Nasios, 314 Md. 433,

In fraud claims, the "statute of limitations begins the fraud is discovered or should have been

discovered by the exercise of due diligence."

Brumbaugh v.

Princeton Partners, 985 F.2d 157, 162 (4th Cir. 1993). To start the running of the statute of limitations clock, U.S. Home must have had some notice of the fraud. 14 To satisfy

the discovery rule, a claimant must be found to possess "express knowledge" or "implied actual knowledge," which is "that

knowledge that would in all probability have resulted from a reasonably diligent that investigation would cause pursued a upon awareness person of to

circumstances

reasonable

investigate." Pennwalt, 314 Md. at 443. It is not obvious from the face of the complaint that U.S. Home had adequate knowledge of the alleged fraud prior to May 2006. The parties have disagree acquired over the when U.S. Home could for be the

considered

to

knowledge

necessary

clock to start running.

Seller asserts that the tolling period

for the statute of limitations began the day that the Purchase Agreement was signed: November, 15, 2005, and certainly no later than several months later in May 2006. (Paper 63, at 11). U.S.

Home argues that it did not have knowledge until 2008. (Paper 70, at 6). well The complaint 2008, itself just a alleges year conduct the to have

continued

into

before

amended

complaint was filed, and so it is not obvious from the face of the complaint that the statute of limitations would bar any claim. Therefore, the statute of limitations claim is not

appropriate as grounds for dismissal of the claims. b. Fraud Pleading

U.S. Home alleges two counts of fraudulent behavior in its amended complaint: fraudulent inducement 15 (count IV) and

fraudulent concealment (count V). both claims because U.S. Home

Seller has moved to dismiss does not meet the pleading

requirements of Fed.R.Civ.P. 9(b).

(Paper 63, at 15).

The tort of fraudulent inducement "means that one has been led by another's guile, surreptitiousness or other form of

deceit to enter into an agreement to his detriment." Capital Source Finance LLC v. Delco Oil Inc., 608 F.Supp.2d 655, 666 (D.Md. 2009)(citing Rozen v. Greenberg, 165 Md.App. 665, 674 (2005))(internal citations omitted); Paul Mark Sandler & James K. Archibald, Pleading Causes of Action in Maryland §§ 3.25-3.26 (2004)). In order to recover for either fraud or fraudulent inducement, a plaintiff must prove (1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation. Nails v. S & R, Inc., 334 Md. 398, 415 (1994)(citing cases); Rozen, 165 Md.App. at 674-75 (citing Hoffman v. Stamper, 385 Md. 1, 28 (2005)). The essential include: elements (1) the for a claim owed of a fraudulent to the

concealment

defendant

duty

16

plaintiff to disclose a material fact; (2) the defendant failed to disclose that fact; (3) the defendant intended to defraud or deceive the plaintiff; (4) the plaintiff took action in

justifiable reliance on the concealment; and (5) the plaintiff suffered damages as a result of the defendant's concealment. Lloyd v. General Motors Corp., 397 Md. 108, 138 (2007)(citing Green v. H & R Block, 355 Md. 488, 525 (1999)). U.S. Home bases both of its claims of fraudulent behavior on representations made in §12.2(d) of the Purchase Agreement. Section 12 of the Agreement covers the condition of the Property and various covenants. Section 12.2(d) reads:

Prior to the date hereof, WPE has delivered to Purchaser a copy of its existing environmental report(s). To the best of WPE's and Settlers Crossing's knowledge, except as disclosed in the environmental report(s) delivered to Purchaser, (i) there are not "Hazardous Materials" (defined below) located on or within the Property; (ii) no portion of the Property has been used for the storage, use, generation, treatment or disposal of Hazardous Materials; and (iii) there are no underground fuel tanks located upon the Property. The term "Hazardous Materials" means (A) hazardous wastes, hazardous substances, and toxic materials prohibited or regulated by federal, state or local law, regulation or order, (B) asbestos, (C) oil petroleum products and their byproducts, and (D) polychlorinated biphynls ("PCBs"). (Paper 1, Ex. 1 at 16).

17

In its cause of action for fraudulent inducement, U.S. Home alleges that "in the context of negotiating the Purchase

Agreement in Maryland and/or Virginia" and "pursuant to Section 12.2(d) of the Agreement, Seller represented and warranted that the Property had never been used for the disposal of Hazardous Materials as defined in the Purchase Agreement and that there were no such Hazardous Materials on the Property." 124). that (Paper 52 ¶

U.S. Home alleges that it relied on the representations there were no hazardous materials (Id.). Home on the In Property count by for

executing fraudulent

the

Purchase

Agreement. U.S.

its

concealment,

argues

that

Seller

"intentionally and knowingly misrepresented and warranted that the Property had never been used for the disposal of Hazardous Materials and further that the Property did not contain

Hazardous Materials. . . ." (Paper 52 ¶ 131). Seller argues that both claims must be dismissed because U.S. Home has failed to allege that Seller made a "false

representation" in the Purchase Agreement, and both causes of action depend upon the existence of a "false representation." Seller argues that no false representation could have occurred in § 12.2(d) because § 12.2(d) is qualified in what it promises. That section represents only that there are no hazardous

materials "to the best of Seller's knowledge."

Seller argues

that for U.S. Home to rely on this representation would have 18

been unreasonable because it would not have taken into account the limiting qualifications in § 12.2(d) about Seller's

knowledge and the enclosed documents given to U.S. Home. Each party is accusing the other of purposely misreading its intent. Seller argues that U.S. Home is misreading §

12.2(d) to mean that the guarantee contained therein was an absolute property. argument. guarantee that no hazardous materials were on the

Similarly, U.S. Home accuses Seller of misreading its It has alleged that Seller had knowledge of the

sludge disposal and that when it failed to notify U.S. Home of the disposal, it breached § 12.2(d). U.S. Home has clearly alleged not only the

misrepresentation upon which it bases its claims, but also its reliance and the "time, place and has contents" met its of the false for

representations,

and

therefore

requirement

pleading under Rule 9(b). prove either that the

In a fraud case, a plaintiff must had a duty to disclose a

defendant

material fact to them and failed to do so, or that the defendant concealed a material fact for the purpose of defrauding the plaintiff. F.Supp. 539, See Shaw v. Brown & Williamson Tobacco Corp., 973 551 (D.Md. 1997). In this case, U.S Home is

arguing the latter: that Seller omitted important facts about the sludge disposal in its representations to U.S. Home and that it did so with the intent to defraud U.S. Home. 19

Furthermore, Seller is aware of the factual basis of U.S. Home's claims. The United States Court of Appeals for the

Fourth Circuit ("fourth circuit") has held that a court should hesitate to dismiss a complaint under Rule 9(b) "if the court is satisfied (1) that the defendant has been made aware of the particular circumstances for which she will have to prepare a defense at trial, and (2) that plaintiff has substantial

prediscovery evidence of those facts."

Harrison v. Westinghouse In the

Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999).

instant action, the parties have been engaged in discovery for months and Seller is aware of and knowledgeable about the

allegations and circumstances that it will have to rebut at trial. denied. 2. Count VI (breach of environmental representations and warranties) Plaintiff alleges in its amended complaint that Seller has breached Section the environmental of the representations and warranties reiterates in its Therefore, the motion to dismiss these claims will be

12.2(d)

Agreement.

Seller

arguments concerning the misreading of § 12.2(d) in moving the court to dismiss that it this is cause of action, § and U.S. Home again the

asserts

not

misreading

12.2(d).

Though

representation in § 12.2(d) is qualified as being "to the best of [Seller's] knowledge" and "except as disclosed in the

20

environmental

report(s)

delivered

to

[U.S.

Home],"

it

is

possible for U.S. Home to prove at some point that the best of Seller's knowledge included information about the sludge

disposal operation. dismissed. IV.

Therefore, this cause of action will not be

Motion to Dismiss the Counterclaim Settlers Crossing and WPE, joined by Bevard a and iStar

(collectively, against U.S.

"Counter-Plaintiffs"), Home Corporation

brought and

counterclaim Corporation

Lennar

(collectively, "U.S. Home") on June 30, 2009. In their counterclaim,

(Paper 66). bring three

Counter-Plaintiffs

causes of action against U.S. Home: I) Seeking a declaratory judgment that conditions precedent to settlement of the Purchase Agreement were satisfied as of November 25, 2007, April 28, 2007 or March 15, 2009, and that U.S. Home violated its duties of good faith and fair dealing and defaulted on the Agreement and Services Contract; II) Specific Performance against U.S. Home and, III) Specific Performance against Lennar. (Paper 66).

In its motion to dismiss the counterclaim, U.S. Home argues that declaratory and judgment that none and of specific the performance are not

appropriate,

counter-plaintiffs (Paper 76).

except For the

iStar is the real party in interest.

reasons listed below, the motion to dismiss will be denied.

21

A.

Declaratory Judgment

U.S. Home moves to dismiss Counter-Plaintiffs' first cause of action on the grounds that declaratory judgment may not be used as a substitute at 6). for U.S. a ripe breach of contract because claim.

(Paper

76,

Home

argues

that

Counter-

Plaintiffs' "right to damages" has matured, they are free to pursue a breach of contract claim and the court should dismiss the declaratory judgment action. U.S. Home argues that Counter-

Plaintiffs' rights have "wholly matured" and that defined, ripe, breach of contract claims exist and should be asserted instead of an action for declaratory judgment. (Paper 76, at 6).

U.S. Home relies on Newton v. State Farm Fire & Cas. Co., a case in which the court dismissed a declaratory judgment claim due to the existence of a parallel claim for breach of contract. (Id., citing Newton v. State Farm Fire & Cas. Co., 138 F.R.D. 76, 79 (E.D.Va. 1991)). In Newton, the plaintiffs filed both a

breach of contract claim and sought declaratory judgment against their insurance company for its refusal to indemnify. found that the request for declaratory judgment serves no useful purpose and will not clarify the legal rights or obligations. While the existence of another adequate remedy does not operate as a bar to declaratory relief, plaintiffs' suit presents the type of factual questions more appropriately considered in the companion breach of contract portion of their complaint. . . 22 The court

declaratory relief will dispute as to whether requires payment. Newton, 138 F.R.D. at 79-80.

not terminate the plaintiffs' claim

U.S. Home argues that the issue

that needs to be resolved is more clearly suited for a breach of contract claim, not a declaratory judgment action. Counter-Plaintiffs controversy discretion remain. exists, and the the maintain court claim that should for because exercise declaratory a its legal broad to

permit

relief

(Paper 77, at 6).

Counter-Plaintiffs point out that in

its first amended complaint U.S. Home is seeking a declaration that it did not commit a default for failing to settle, and Counter-Plaintiffs are simply seeking the reverse: a declaration that U.S. Home was obligated to settle (on one of three dates). (Id.). Counter-Plaintiffs maintain that the Purchase Agreement

needs to be interpreted to define the respective rights and obligations of the parties and that a declaratory judgment

action allows the court to do this.

(Id., at 9).

They add that

there is no threat of piecemeal litigation because this action will simply round out the litigation so that the court must determine rights and obligations for all parties. (Id., at 10).

The Declaratory Judgment Act provides that "[i]n a case of actual controversy within its jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such a declaration, 23

whether or not further relief is or could be sought." § 2201. The fourth circuit has held: it is elementary that a federal court may properly exercise jurisdiction in a declaratory judgment proceeding when three essentials are met: (1) the complaint alleges an actual controversy between the parties of sufficient immediacy and reality to warrant issuance of a declaratory judgment; (2) the court possesses an independent basis for the jurisdiction over the parties (e.g., federal question or diversity jurisdiction); and (3) the court does not abuse its discretion in its exercise of jurisdiction.

28 U.S.C.

Volvo Equip. N. Am. v. CLM Equip. Co., Inc., 386 F.3d 581, 592 (4th Cir. 2004)(citing 28 U.S.C. § 2201; Cont'l Cas. Co. v.

Fuscardo, 35 F.3d 963, 965 (4th Cir. 1994)). There is no dispute that the first and second requirements of a declaratory judgment action are present in the instant action. The court must determine whether to use its discretion "A federal a court

to decline to hear the declaratory action. has the discretion to decline to

entertain

declaratory

judgment action, but . . . the court must do so only for `good reason.'" Cont'l Cas. Co., 35 F.3d at 965 (quoting Aetna Cas. & "In

Sur. Co. v. Quarles, 92 F.2d 321, 324 (4th Cir. 1937)).

deciding whether to entertain a declaratory judgment action, a federal court should analyze whether all its resolution of the of the

declaratory

action

will

settle

aspects

legal

controversy. . . .

[I]t makes no sense as a matter of judicial 24

economy for a federal court to entertain a declaratory action when the result would be to `try a controversy by piecemeal, or to try particular issues without settling the entire

controversy.'"

Mitcheson v. Harris, 955 F.2d 235, 239 (4th Cir. Declaratory relief is

1992)(quoting Quarles, 92 F.2d at 325)).

appropriate when the court finds that (i) it will serve a useful purpose in clarifying and settling the legal relations in issue, and (ii) it will terminate and and afford relief from to the the

uncertainty, proceeding." In this

insecurity,

controversy

giving

rise

Fuscardo, 35 F.3d at 965. case, the declaratory judgment action in the

counterclaim may help to clarify the legal issues and to resolve the controversy over whether U.S. Home was obligated to settle at some point. The reciprocal declaratory judgment claims will

ultimately enable the court to determine whether all conditions precedent to settlement to the Purchase Agreement were met on one of three dates, obligating U.S. Home to settle. at 28). claims (Paper 66,

It is also part and parcel of the specific performance asserted in the counterclaim. Here, the declaratory

judgment action will serve the purpose of enabling the full rights and obligations of the parties to be conclusively

articulated so that full relief can be afforded to the injured party. Accordingly, U.S. Home's motion to dismiss this claim

will be denied. 25

B. U.S.

Specific Performance Home also moves to dismiss Counter-Plaintiffs' (Paper 76). two

claims requesting specific performance.

Counter-

Plaintiffs ask the court to enter an order requiring both Lennar and U.S. Home specifically to perform their obligations to pay the purchase price due under the Purchase Agreement at

settlement and to pay the development fee due under the Services Contract to Bevard. (Paper 66, at 29-30). Counter-Plaintiffs

allege through their declaratory judgment cause of action that U.S. Home was obligated to settle on December 5, 2007 or May 27, 2008 or April 14, 2009. If U.S. Home was required to settle on

one of those dates, then it was in default when it failed to do so and specific performance may be warranted. 29). U.S. Home argues that the claims must be dismissed because Counter-Plaintiffs fail to allege facts sufficient to entitle them to relief. (Paper 76, at 9). Specifically, U.S. Home (Paper 66, at 28-

argues that § 15(a) of the Purchase Agreement creates specific steps that Counter-Plaintiffs remedy for must take before and invoking those the

contractual

specific

performance,

steps

have not been taken.

Section 15(a) reads:

(a) If Purchaser shall either (i) wrongfully fail to make Settlement hereunder for any reason other than a default by [Seller] under the terms of this Agreement and such failure is not cured within five 26

(5) business days after written notice from Settlers Crossing, or (ii) breach any of its representations, warranties or covenants set forth . . . , or (iii) otherwise defaults under this Agreement and such default continues for a period of ten (10) business days . . . , then Settlers Crossing shall have the right, as its sole and exclusive remedy, to elect one of the following remedies: (1) . . . terminate the Agreement and have the Deposit . . . delivered to Settlers Crossing . . . , or (2) Settlers Crossing shall be entitled to specific performance and injunctive relief against Purchaser before a court of competent jurisdiction to order Purchaser to perform the obligation which Purchaser is required to perform hereunder, including without limitation, in the case of item (i) above, to compete the Settlement in accordance with the Agreement and pay the Purchase Price to Settlers Crossing. . . . This specific performance may be coupled with an action to enforce Lennar's Guaranty Obligations. . . (Paper 1, Ex. 3 at 21-22)(emphasis added). The section goes on

to provide that if the Purchaser defaults beyond the notice and cure period, Settlers Crossing must elect either (1) or (2) above and deliver written notice to the Purchaser within 90 days which election it will make. (Id.). If Settlers Crossing fails

to deliver written notice, and Purchaser provides notice that it has not made an election and Settlers Crossing still does not make an election within ten days, "Settlers Crossing shall be deemed to have elected (1)." According to § (Id.). in order to elect specific

15(a),

performance, Counter-Plaintiffs must have (1) issued notice of

27

default to U.S. Home for failing to settle, (2) provided U.S. Home the required opportunity and time to cure, and (3) timely and properly elect the remedy of specific performance, and

provide notice of the election to U.S. Home.

(Paper 76, at 10).

U.S. Home maintains that Counter-Plaintiffs do not include any factual allegations in the counterclaim that state the

Counter-Plaintiffs took any of the above steps and therefore a claim for specific performance under the Purchase Agreement has not been alleged. Counter-Plaintiffs use both § 15(a) and the Declaratory

Judgment Act to support their claims for specific performance. First, they argue that if the court takes the counterclaim

allegations as true, they have adequately alleged all necessary steps for complying with the requirements of § 15(a). Counter-

Plaintiffs maintain that the court must rely and accept as true the statement in the counterclaim that "all notices, elections of remedy and other performance required under those agreements have been timely satisfied." ¶¶ 69, 75-77). (Paper 77, at 13 quoting Paper 66

They also point to the letter sent to U.S. Home

on May 30, 2008 which notifies U.S. Home that it has wrongfully failed to make settlement and that it is in default. 1, Ex. 19). Second, Counter-Plaintiffs base their claim for specific performance on the Declaratory Judgment Act, 28 U.S.C. § 2202, 28 (See Paper

as well as on §15(a) of the Purchase Agreement.

Even if they

have not alleged facts sufficient to satisfy § 15(a), CounterPlaintiffs argue that if the court finds that U.S. Home was obligated to settle the Purchase Agreement on December 5, 2007, then the court may properly award Counter-Plaintiffs declaratory relief pursuant to its power under the Declaratory Judgment Act. Specific performance of a contract is a matter of sound judicial equity. discretion controlled by established principles of

To qualify for specific performance, a plaintiff must

prove the existence of an agreement between the parties and a breach of that agreement by the defendant. See Data

Consultants, Inc. v. Traywick, 593 F.Supp. 447, 453 (D.Md. 1983) (citations omitted) (citing Offutt v. Offutt, 106 Md. 236, 67 A. 138 (1907)), aff'd, 742 F.2d 1448 (1984)(Unpublished

Disposition); see also Namleb Corp. v. Garrett, 149 Md.App. 163, 174 (2002)("Specific case and on performance the basis of each may of be the granted strength (citing in of Zouck Md. an the v. 83

appropriate circumstances Zouck, (2003). In 204

equities 296

party." cert.

Md.

285,

(1954))),

denied,

374

this

case,

dismissing

the

counts

for

specific

performance would be premature. that it met the requirements

Seller has adequately alleged in the Purchase Agreement for

seeking specific performance for the purposes of surviving a 29

motion to dismiss, when the court must consider all factual allegations in the light most favorable to the plaintiff.

Furthermore, specific performance, when applied, is generally applied in real estate cases where a breach of contract has occurred. See James v. Pratt & Whitney, United Techs. Corp.,

126 Fed. Appx. 607, 611 (4th Cir. 2005)(finding that special damages appear to arise in two types of cases other than civil conspiracy: disputes involving real property and causes of

action for libel and slander)(Unpublished Disposition); Fin. Corp. v. Natanzon, 509 F. Supp. 2d 501, 511

Baron (D.Md.

2007)(Noting that "a reward of specific performance is generally considered an extraordinary remedy, especially outside of the context of contracts for sale of land."). Moreover, declaratory the specific claim are performance closely tied claims and and the it

judgment

together

would be efficient to permit these claims to go forward so that all pending issues in this case may be resolved simultaneously. C. Real Party in Interest

Lastly, U.S. Home moves to dismiss Settlers Crossing, WPE and Bevard from the counterclaim, contending that they lack any standing to assert any contractual claims arising from the

Agreements.

U.S. Home argues that Settlers and WPE assigned

their right, title and interest under the Purchase Agreement to

30

iStar, and Bevard assigned its right, title and interest under the Services Contract to iStar. (Paper 76, at 13).

The assignment contracts ("Assignments") between iStar and the other Counter-Plaintiffs were created because a bridge loan was needed after the delay in settlement between U.S. Home and Seller. (Paper 66 ¶ 37). WPE obtained the new funding from

iStar on June 19, 2007, and it was intended to be repaid at settlement. Because of the loan, Settlers Crossing and WPE

entered into one "collateral assignment" with iStar, and Bevard entered into another "collateral assignment." 39). (Paper 66 ¶¶ 38-

Pursuant to the terms of the Assignments, WPE and Settlers

Crossing assigned and transferred to iStar all of their rights, title and interest under the Purchase Agreement, and Bevard did the same regarding the Services Contract. Assignments continuation provide of an that upon of the (Id. ¶ 39). and during The the loan

occurrence

"Event

Default"

under

iStar's

agreements, "iStar would be entitled, at its option, to exercise all rights in, to and under the Agreement and Services Contract, whether or not iStar took possession of the mortgaged property." (Id.; See also Paper 52, Ex. 26 § 5). U.S. Home argues that because Counter-Plaintiffs allege

that an "Event of Default" occurred after July 18, 2008 and continues, interest, "Settlers, right or WPE claim and Bevard they 31 have can no current, under legal the

that

assert

Agreements.

Therefore, they have no standing to assert any of (Paper 76, at 14). has dismissed a U.S. case

the counts in the Joint Counterclaim."2 Home cites to cases in which a

court

because the party who brought the charge was not the "real party in interest." 1999)(Holding See In re Maco Homes, 180 F.3d 163 (4th Cir. that the case must be dismissed because the

appellee had assigned all of its rights away, and the real party in interest did not join in the appeal of the claim.). Counter-Plaintiffs argue that although iStar does have an interest in the case, Federal Rule of Civil Procedure 17 does not require that one party with an interest pursue an action to the exclusion of others who also have an interest. They agree

with U.S. Home that iStar has broad rights because of the "Event of Default" and that it has the right to exercise all rights and remedies under the loan agreement, including the rights of

Settlers Crossing and WPE and of Bevard.

(Paper 77, at 18).

Because it has broad rights, Counter-Plaintiffs argue, nothing in the Assignments restricts iStar's ability to jointly seek a remedy from the court. They argue that § 19 of the Assignments

does not mean that iStar can proceed with the counterclaim only

Though initially U.S. Home uses the phrases "real party in interest" and "standing" interchangeably, these two concepts are different and present different requirements. Ultimately, it appears that U.S. Home is arguing that iStar is the only real party in interest. 32

2

in its name or only in the name of the Assignors.

Moreover,

Counter-Plaintiffs argue that § 19(b) restricts U.S. Home from attempting to enforce the Assignments, and that only iStar may interpret and enforce its rights under the Assignments. 77, at 19). Fed.R.Civ.P. 17(a), which outlines the requirements for (Paper

parties to a suit, provides (a) Real Party in Interest. (1) Designation in General. An action must be prosecuted in the name of the real party in interest. The following may sue in their own names without joining the person for whose benefit the action is brought: (A)an executor; (B)an administrator; (C)a guardian; (D)a bailee; (E)a trustee of an express trust; (F)a party with whom or in whose name a contract has been made for another's benefit; and (G)a party authorized by statute. . Fed.R.Civ.P. 17(a). meaning and object The fourth circuit has held that "[t]he of the real party in interest principle

embodied in Rule 17 is that the action must be brought by a person who possesses the right to enforce the claim and who has a significant interest in the litigation." Virginia Electric &

Power Co. v. Westinghouse Electric Corp., 485 F.2d 78, 83 (4th Cir. 1973). the person The real party in interest may not necessarily be "who will ultimately benefit from the recovery."

33

Farrell Construction Co. v. Jefferson Parish, La., 896 F.2d 136, 140 (5th Cir. 1990). The fourth circuit has interpreted Rule 17(a) as a way to protect defendants ­ in this case U.S. Home and Lennar ­ from having to defend themselves against a subsequent action brought by the party actually entitled to relief. 485 F.2d at 84. In this case, all Virginia Electric, parties have

potential

jointly filed a counterclaim against U.S. Home and so no danger exists of a "multiplicity of lawsuits." In a case involving an assignment, courts may consider two issues: (1) what has been assigned to whom and (2) whether the assignment is valid. See 6A Charles Alan Wright et al., Federal At this point in

Practice and Procedure § 1545 (2nd ed. 1990).

the case, making a final determination regarding either inquiry is premature. Both parties agree that an "Event of Default" has

occurred and that iStar now has the right to exercise all rights and remedies under the loan agreements, however, the rights of the parties under the Purchase Agreement and Services Contract have yet to be determined. that all rights under all The court has also not determined agreements have been exclusively

assigned to iStar by the other Counter-Plaintiffs, or that iStar must proceed individually or in the name of the other CounterPlaintiffs (the assignors).

34

Finally, multiple real parties in interest in a given claim may prosecute an action. Rule 17(a)(3) states that

The court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action. After ratification, joinder, or substitution, the action proceeds as if it had been originally commenced by the real party in interest. Fed.R.Civ.P. 17(a)(3). In this case, iStar has "ratified" the

inclusion of its fellow Counter-Plaintiffs in this counterclaim by working with Settlers Crossing, WPE and Bevard to prosecute the case. Moreover, allowing all Counter-Plaintiffs to proceed

at this time may prevent later actions from being filed by each individual party and is therefore the most efficient way to proceed with the action. V. Conclusion For the foregoing reasons, Seller's motion to dismiss

counts IV, V and VI of the first amended complaint will be denied, and U.S. Home's motion to dismiss the counterclaim will be denied. A separate Order will follow.

/s/ DEBORAH K. CHASANOW United States District Judge

35